The Ontario Pensions Benefit Act has not been substantially amended in over 20 years. As a result, employers have largely relied upon the courts to define the parameters of their rights and obligations as pension plan sponsors and administrators.

An issue that remains undetermined and ready for further judicial clarification is how employers, as plan sponsors and administrators, should manage employee pension funds. On January 31, 2008, the Supreme Court of Canada (SCC) granted members of an employees’ pension committee leave to appeal a dispute on this very question. In particular, the SCC is being asked to decide in the case of Nolan v. Kerry (Canada Inc.):

  1. whether an employer is entitled to use the surplus in the pension plan fund to pay for a contribution holiday;
  2. whether an employer is entitled to pay plan expenses from the pension fund; and
  3. whether an employer is entitled to use surplus assets in the defined benefit part of a pension plan to pay its contributions in the defined contribution part of the plan.

Background

The origins of the Nolan v. Kerry (Canada) Inc. case go back to 1954, when Canadian Doughnut Company Limited established a pension plan for its employees. For the first 20 years of its existence, the plan operated at a surplus, and plan members always received their full pension benefits. Over the years, the plan was amended. In 1985, the company began taking “contribution holidays,” that is, it began to notionally pay its annual contribution obligations out of the pension fund.

In 1994, Kerry (Canada) Inc. purchased the business and became the sponsor of this 40-year-old defined benefit pension plan. In total, Kerry and its predecessors took contribution holidays amounting up to $1.5 million. Kerry also began to pay plan expenses directly from the pension fund. Finally, in 2000, Kerry amended the plan and provided for the addition of a defined contribution component. Kerry used the surplus from the pre-existing defined benefit part of the plan to satisfy its contribution obligations to the defined contribution part of the plan.

Legal Proceedings

Former employees of Kerry and members of the plan (Employee Committee) objected to the changes and asked the Superintendent of Financial Services to investigate the administration of the fund. The Superintendent ordered Kerry to reimburse the expenses paid from the fund, but refused to find that Kerry should reimburse the fund for amounts saved by virtue of the contribution holidays.

Both parties were unhappy with the Superintendent’s decision and independently took the matter to the Ontario Financial Services Tribunal. This was followed by an appeal to the Ontario Divisional Court and then to the Ontario Court of Appeal.

The Court of Appeal’s decision was deemed a sweeping victory for Kerry and pension plan sponsors and administrators everywhere. First, the Court of Appeal held that expenses of a plan can be paid from the plan assets unless the plan agreement states otherwise. In this case, the Court of Appeal found that in the absence of such a provision and irrespective of its past conduct, Kerry was not obligated to pay those expenses.

Secondly, the Court of Appeal held that Kerry was entitled to take contribution holidays in the defined benefit plan when the plan sustains an actuarial surplus.

Finally, in direct contrast to the decision rendered by the Divisional Court, the Court of Appeal held that the introduction of the defined contribution provisions did not create a second pension plan. As a result, the surplus from the defined benefit part of the plan could be used to satisfy contributions for the defined contribution part of the plan. The Court of Appeal found that this conclusion was further substantiated by the fact that the Regulations to the Act permit surplus assets to be used to fund employer contributions to the defined contribution part of the pension plan following a plan conversion.

As predicted, the Employee Committee sought leave to appeal this decision to the SCC, which has agreed to hear the appeal in November of 2008.

What Does this Mean for Employers?

The decision rendered by the Court of Appeal was welcome news for employers everywhere. However, in light of the SCC’s decision to hear an appeal of the case, employers must remain guarded. The SCC has heard a number of major pension cases in the past decade and has seemingly guided the development of this emerging area of the law. As a result, the outcome of this case will essentially determine the costs employers must bear to sponsor and administer a pension plan.

It is important to note that in addition to this pending judicial determination, the Ontario Government is currently engaging in an indepth review of its pension legislation with a view to legislative change. As such, Ontario employers should brace themselves for what could be drastic changes to come.